The biggest theme driving global markets in recent months has been the likelihood that the Federal Reserve will begin to taper back the pace of its monthly bond purchases later this year as the economy improves.
Primary dealers of Treasuries on Wall Street expect the Fed to announce a tapering of purchases to $65 billion a month from the current rate of $85 billion a month at the September FOMC meeting.
Today’s ADP report on unemployment and the advance release of second quarter GDP both sent the bond market tumbling, suggesting that it is pricing in a greater chance that the Fed announces tapering soon.
If that’s the case, though, it could put the Federal Reserve in an awkward position when September rolls around – provided that the tapering timeline is still on track – because given the tepid pace of growth reported in today’s GDP release, it will likely have to downgrade its economic projections.
“In light of real GDP growing by only 1.4% at an annualized rate in the first half of 2013, it is unlikely that growth in the second half will be strong enough for the Fed’s 2.3 to 2.6% real GDP growth projection to be realised,” says Goldman Sachs chief economist Jan Hatzius. “As a result, we would expect a downward revision to the Fed’s 2013 growth forecast in the September Summary of Economic Projections.”
In order for the Fed to continue forecasting 2.3-2.6% real GDP growth in 2013, it must expect GDP to grow 3.2% in the second half of this year.
Today’s GDP release was only the first estimate of Q2 GDP data. It could get revised up or down next month before the September FOMC meeting.